On April 28, 2015, the IRS issued Notice 2015-10, 2015-20 IRB (the “Notice”), in order to inform taxpayers that it expects to issue regulations which are intended to provide limitations on refunds of certain overpayments of taxes withheld by withholding agents1 under Chapters 3, Withholding of tax on nonresident aliens and foreign corporations, as well as pursuant to Chapter 4, Foreign Account Tax Compliance Act (FATCA). These amounts are reported on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.
When Form 1042 is filed, the withholding agent must pay any balance due if the total amount of deposited withholding tax is less than the amount of withholding, which is reported when Form 1042 is filed by the withholding agent2.
IRC sections 1441 and 1442 require that withholding agents withhold tax on certain income paid to nonresident alien individuals as well as on certain income paid to nonresident corporations. IRC sections 1471 through 1474 require withholding agents, absent certain documentation, to withhold tax on certain payments made to foreign financial institutions as well as to nonfinancial foreign entities.
The IRS will amend IRS Treasury regulation sections 1.1464-1(a) and 1.1474-5(a)(1) to provide that no refund will be allowed of withholding taxes under Chapters 3 and 4 if such amounts have not been deposited by the withholding agent.
The current information reporting, withholding, and deposit procedures do not indicate on Forms 1042 and 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, which beneficial owner the deposit of tax relates to.
In lieu of requiring direct tracing or specific identification of such deposits for matching purposes, for those withholding agents that process and deposit a large amount of payments as well as for the IRS to overcome such an administrative burden, an allocation method will be provided.
The deposits made to the Form 1042 account by the withholding agent will be divided by the amount reported as withheld on all Forms 1042-S filed by the withholding agent to calculate a deposit percentage. Under the above withholding tax regimes, the withholding agent will be considered to have made a deposit equal to the amount reported as withheld on the Form 1042-S, times the withholding agent's deposit percentage, for each claimant. Such result will be allocated to each claimant. If the allocation of such deposit exceeds the withholding liability associated for the claimant, a refund or credit will be allowed.
The notice also provides that the Treasury Department and the IRS are considering certain exceptions to the general provisions of the notice in order to minimize the potential for fraud or the intentional disregard of the withholding deposit provisions as well as a de minimis exception for a withholding agent with a good history of deposit compliance.
The notice solicits written comments from taxpayers affected by June 29, 2015. Send comments to: CC:PA:LPD:PR (NOT-2015-10), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044.
1Withholding agents are liable for such withholding under IRC section 1461.
2See IRC section 6302.
Philip T. Pasmanik is a Senior Tax Manager – Planning and Compliance at Hunrath, Napolittano, Quigley & Taylor, LLC, and is a member of the AICPA International Tax Resource Panel and is Chair of the AICPA Withholding Tax Task Force. He can be contacted at firstname.lastname@example.org.